Weighing the Costs and Benefits of Open Innovation

Ask most crowdsourcing enthusiasts about the benefits of open innovation, and you’ll invariably hear about reduced costs.

On the surface, this makes sense – sourcing ideas from outside a company’s own R&D department taps a larger pool of contributors who work on the promise of potential partnership in the future, not a guaranteed salary.

Look a little closer, though, and you’ll see costs that aren’t readily apparent at first. Aside from paying a fee to an intermediary (like NineSigma, InnoCentive, or ChallengePost) and paying out for a winning idea, companies must spend on legal fees, manage the campaign, market it, and spend valuable time sorting through ideas.

Given these costs, does open innovation still make sense? We spoke with industry experts to learn more about the costs and benefits of open innovation, and to find out how a company can maximize benefits while keeping costs down.

What’s in a name?

Henry Chesbrough, who coined the term, defined open innovation as “the use of purposive inflows and outflows of knowledge to accelerate internal innovation, and expand the markets for external use of innovation, respectively.”

This is a tidy definition, which stresses both the inflows and outflows of knowledge as being key to open innovation. In practice, however, the term is relatively loose and means different things to different people, notes Ammon Salter, professor of technology and innovation management at the Imperial College in London.

Everything from industry-university collaboration and expert sourcing to ideation challenges have been called examples of open innovation. This ambiguity contributes to the difficulty of figuring out whether the benefits of open innovation outweigh the costs. In this article, we focused primarily on ideation challenges, both those done under the guidance of an intermediary, and those completed in-house.

The Costs

“The evaluation process was far more labor-intensive than we’d anticipated; significant investments of time, energy, patience, and imagination are required to discern the gems hidden within rough stones,” he wrote. “Anyone attempting to do innovation on the cheap should look elsewhere.”

Aside from the hours it took to sort through ideas (and this despite using the Brightidea innovation management software), Jouret also mentioned the difficult process of drafting a legal framework around intellectual property management for the challenge.

This, however, just scratches the surface of the services companies must perform when running an ideation contest. ChallengePost, which runs the Challenge.gov platform as well as separate technology challenges, outlines over a dozen services it offers to its customers. These include everything from creating a branded platform and planning milestones, to copy writing, community management, legal writing, online and offline promotion, judge panel building, testing submissions, and prize fulfillment, among other services.

Intermediaries like ChallengePost make it easier for companies to run open innovation challenges, but – as Jouret’s case study shows – they must still be involved in the evaluation process, and even more so in the implementation of an idea. Sometimes, however, the firms are simply unprepared to deal with the outside ideas.

“A lot of companies don’t give enough attention to the internal phase of open innovation, the processes they need to put in place to, kind of, market it inside the firm,” said Professor Salter. “So what happens is they [set up] these external portals, and ideas emerge from there that could potentially be useful to the firm, but then they die. No one picks them up and champions them.”

That’s partly why Salter believes there is little “compelling evidence” that open innovation is cheaper and results in faster time to market. While there have been wonderful success stories, he noted, there has also been lots of failure.

Innovation intermediaries, he thinks, are appealing to large firms in part because they help to identify and define problems, something that large, inward-looking firms may have difficulty with. But even that, he says, may be an overstated benefit.

“Part of the challenge is when you define a technological problem well,” he explained, “you often get close to the solution.”

The Benefits

Andy Zynga, CEO of NineSigma, an intermediary, doesn’t disagree with Salter’s statement, but thinks there’s a different lesson to be drawn.

“We say that all the time: a problem well stated is a problem half solved,” Zynga enthused. “The whole process of practicing open innovation has many ripple effects. One of [them] is more than just saying, ‘I’m going to the outside,’ it’s really more about the attitude, culture, and process… You don’t have to go outside [the company] right away.”

The CEO went on to say that some of NineSigma’s clients are now using the processes of external innovation, internally. Indeed, that is a sentiment shared by other intermediaries, who see the ability to shape the solver community – being able to switch between internal groups, strategic partners, customers, and unaffiliated crowds – as an important part of the services they offer.

Zynga said that there are a number of risk-reducing benefits to looking outside the organization, when that becomes necessary.

“Getting an outside perspective on your projects… helps you to have a better feel for how [the market is reacting] to this, what are some of the solutions that are out there. This outside perspective helps you to reduce the risk,” he explained. “Another benefit is – when you have people from the outside contributing to what you’re doing, you may reduce the cost of not doing something, like the Kodak example.”

Moreover, Zynga believes, practicing open innovation has the benefit of mitigating two cognitive biases: curse of knowledge and functional fixedness.

“[Curse of knowledge is] when somebody becomes an expert in something, it becomes extremely difficult for the person to communicate to the outside world problem statements, what they’re doing,” he explained. “This… can be overcome by working with someone like us, because all of our program managers are trained in working with clients and saying, ‘What is it that you’re really looking for?’

“Functional fixedness is more about [when] people have certain applications in mind for what their products can do… and can’t really think outside the box,” Zynga continued. “Again, doing open innovation, seeing all the submissions come in – that helps you to overcome that and maybe even to discover new, adjacent markets.”

But putting together the processes and people in place to take advantage takes a serious commitment.

“If you’re just dipping your toes into open innovation, it can be, short-term, a bit of a cost driver,” Zynga admitted. “Unless you do your homework beforehand, and put all the processes in place, and get the people all trained up.” Some of the clients that do already have people and processes in place, he went on to say, reported a 30 percent reduction in time to market.

Lufthansa Cargo’s Open Innovation Efforts

Lufthansa Cargo is the subsidiary of the German airline Lufthansa, the largest airline in Europe. Over the past two years, the cargo carrier has hosted open innovation challenges to solicit ideas from the crowd. The company partnered with the Munich-based intermediary HYVE to help manage the campaigns.

Benjamin Pfeifer, who worked on the contests, said the company decided to open up to the crowd because it wanted to “innovate the innovation process.” He noted the company’s managers were relatively open to the idea from the start, which made it easy to pitch the project. Actually getting the money for the project, however, was a different matter.

“You might know [this] from other companies, it’s normally not very easy to get money for projects where you can’t give any direct benefits,” Pfeifer said with a laugh. “You can say, ‘There might be some ideas we can implement as a company, but to be honest, [we have] no clue that this project would bring benefits to us.’”

The money people obliged, though Pfeifer said the funds quickly ran out and the company had to reinvest in the project after three weeks – advertising the campaign, generating traffic, and processing the ideas took more time and money than Lufthansa Cargo had anticipated.

The company was clearly happy with the results of the first campaign; otherwise, it wouldn’t have invested in the second run. Pfeifer listed many positives of opening up innovation to the crowd.

Aside from the hundreds of ideas that the community submitted (you can see the winners here), one of the biggest positives to come out of it was a newfound openness to new ideas, internally. A new ‘Innovation Management Team’ came into being, and the company’s internal “processes” and “thinking” about innovation changed. An unintended (but not altogether surprising) benefit was that customers also began to think of the company as more innovative, and Lufthansa Cargo’s perception against its competitors improved. On top of that, as Zynga suggested, Pfeifer said receiving ideas from those outside the industry was especially helpful.

That’s not to say everything was positive about the campaigns. The ideation platform was open to anyone – including the competition – and Pfeifer said an American competitor might have taken one of the ideas that came to them.

“We had the understanding that our competitors [would also be] on the platform, but we had the opinion that our competitors were working on these ideas, as well,” he said. “If we did not take the chance to innovate in an active [way], others would do it. The process could be copied quite easily, but [we wanted] to be the first ones… Being the first one is quite good.”

Pfeifer said the campaign’s ultimate key performance indicator is the number of products that come into being from the pool of crowdsourced ideas. One product that he’s especially hopeful for is the ‘Blast Proof Luggage Container,’ which won the first ideation challenge. Pfeifer declined to specify exactly how much Lufthansa Cargo paid HYVE for their services, but he did say it was under $100,000, though “not by much.” He also said that the time spent on the campaign internally was roughly the total of a year’s salary. How does that compare with the potential benefits of running the campaign?

“If we take the example of the [blast proof] container, such a container would enlarge our current product options,” Pfeifer said. “There are products that cannot be flown because they’re too dangerous – batteries for cars [for example]. If you’re talking about revenue potential, that’s definitely more than $100,000. We are producing three billion euros per year in revenue, if [the container] increased the market in air freight products even by one percentage, it would increase our revenues by about 30 million euros.”

So, if the product idea moves to the implementation phase, the campaign will certainly have been worth it – the key word being ‘if.’

Getting the most out of open innovation

As Cisco’s Jouret pointed out, opening up innovation channels to the crowd is no easy task, and companies should be prepared to invest funds and rethink their innovation processes to get the most out of outside ideas.

With the right amount of planning, companies should be able to follow through on the promises they make to outside contributors. Otherwise, they will have an unsavory experience with open innovation.

“A lot of firms want to claim that they’re very open, but they find it quite difficult to deal with the costs and implications of that,” Professor Salter cautioned. “One firm I interviewed said, ‘We have to eat our own dog food. If we say we’re open, we have to be open. We have to press ourselves to actually make the claims on our website true.’”

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